Keep in Mind

While we can try to provide a theoretical explanation for the dynamics of market declines, this is no replacement for first-hand knowledge of the market. You have to experience the heartbreak and upset stomach of a bear market to fully understand it.

Some things to keep in mind:

A bear market is not a market crash. While market declines are popularly associated with rapid, catastrophic losses such as the Crash of 1929, most bear markets are not so dramatic. During the period from January 1973 to September 1974, the S&P Index dropped from a high of 121.74 to a low of 60.96 -- a loss of almost 50% in value. But this did not happen in a single, dramatic loss. It was a long, grinding decline stretched out over 21 months. Although there is no exact definition of a bear market in terms of length of time and amount of loss, it is generally agreed that a bear lasts for a period of months or years and involves a market loss of 15% or more.

If you invest over a long period, chances are you'll see one or more bear markets. Although the early 1990s saw some brief lagging periods in the stock market, there really hasn't been a sizable or lengthy bear market for over a decade. No one knows when this trend will end, but based on history and the cyclical nature of markets, we can expect that it will end sometime.

Market timing is no more effective in a bear market than at any other time. Since we're talking about a gradual decline, it might seem that you can easily "jump out" of the stock market and avoid the worst of a bear market -- simply sell off when it's clear that things are turning downward. But it's never clear that a trend will continue. Occasionally, short-term "corrections" do occur, in which the market drops but then recovers quickly. These drops can set off fears that the market might be heading into a bear period. But in such cases it would be a mistake to sell in order to avoid further decline, because the market does recover.

Loss is inevitable. There really aren't any tricks you can play to guarantee the value of your investment won't decline in a bear market. Fortunately, a sound investment plan should allow you to weather bad times without an undue amount of loss. To get an idea of what it's like to invest during a bear market, meet....

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.